China growth gliding lower, hard landing risks ease

BEIJING | By Koh Gui Qing and Zhou Xin

A vendor waits for customers at her vegetable stall at a market in Shanghai February 9, 2012.

Reuters/Aly Song/Files

BEIJING China's economy is on course for a soft landing, a clutch of indicators showed on Friday, easing investor fears of a sharp slowdown and revealing ample room for Beijing to loosen policy further to support growth.

Expectations of a policy response from Beijing were entrenched by the first major flurry of hard economic data of the year, which revealed an easing in the pace of industrial output, inflation, fixed asset investment and retail sales.

Loan growth data cemented the view that monetary policy would be relaxed further to support demand for credit and ensure policymakers achieve their desired outcome of an economy slowing sufficiently to stop speculative investment, while creating enough jobs to maintain social stability.

"We have had this soft landing story for a while, this is not going to change," said Yiping Huang, an economist at Barclays Capital in Hong Kong. "Policy easing will continue for awhile but there is no urgent need to ease aggressively."

Data showed China's factory output cooled more than expected in the first two months of 2012 to grow just 11.4 percent from a year ago, as slackening demand at home and abroad dragged production to its lowest level in over 2-1/2 years.

That helped to temper consumer inflation, which slowed to 20-month lows of 3.2 percent in February from a year earlier --below forecasts for a 3.4 percent gain and comfortably within Beijing's 2012 inflation target of 4 percent.

Analysts said a combination of slowing growth and moderating inflation should lead China to continue reducing the level of cash its commercial banks must hold as reserves.

By lowering the reserve requirement ratio (RRR) for banks, the People's Bank of China will unwind some of its strident policy tightening of the past year, when it lifted the RRR to record highs to curb three-year high inflation.

CRUCIAL POLICY LEVER

Money supply is a crucial lever in China's monetary policy as it is directly controlled by Beijing through bank loan quotas and RRR adjustment.

China aims to grow its money supply by 14 percent this year to support economic growth of at least 7.5 percent.

"The further easing in the consumer price index provides more room for policy loosening," said Nie Wen, an analyst at Hwabao Trust in Shanghai. "We expect the central bank may cut the reserve ratio once in March."

A Reuters poll in December showed economists expected Beijing to lower banks' required reserve ratios (RRR) by 200 basis points in 2012. The RRR stands at 20.5 percent after two 50-basis-point cuts in February and November.

Firms, especially smaller ones that account for 80 percent of jobs and 60 percent of industrial output, have called for the People's Bank of China (PBoC) to lower the RRR as they say tight monetary conditions are adding to fast-rising costs.

A clearer view of the trade picture is due on Saturday, when China is scheduled to release import and export data for February.

In a sign of tight monetary conditions, central bank data showed M2 money supply grew 13 percent in February from a year earlier, up slightly from near 11-year lows struck in January.

Banks also lent less than forecast, issuing 710.7 billion yuan in new loans in February, missing expectations for 750 billion yuan worth of new lending.

GROWTH, NOT INFLATION

Friday's flurry of releases for industrial output, fixed asset investment and retail sales combined data held back from January to iron out heavy distortions caused by the Lunar New Year holidays.

Retail sales disappointed with growth of 14.7 percent in January-February from a year earlier, short of the 17.5 percent analysts had expected.

Fixed asset investment, which accounted for about half of China's economic growth in 2011, pulled slightly ahead of expectations but was still at its weakest since December 2002.

It grew 21.5 percent in the first two months, compared with forecasts for a 20 percent expansion.

Beijing welcomes slower and better-quality growth that is greener, encourages consumption and is less prone to over-investment, excess capacity, and speculative bubbles.

But even with a push for more moderate expansion, analysts say China's economy will still grow between 8 and 9 percent this year to mark the country's leadership change, well above the official 7.5 percent target.

That means growth, not inflation, is likely to be the first policy priority for now.

"The inflation story is over," economists at HSBC said in a note to clients. "This leaves the PBoC with fewer excuses not to step up its easing efforts to support growth -- especially given the sharp slowdown in exports so far this year."

Analysts say this is especially since, barring a spike in world commodity prices, China's inflation should stay muted for the rest of the year as high 2011 comparison figures force food inflation to slow.

Indeed, annual food price inflation ran at just 6.2 percent in February, a low not seen since June 2010. Food prices represent 30 percent of China's consumer price index, the composition of which is kept secret.

Producer inflation, which some analysts say is a leading indicator of consumer inflation, also cooled faster than forecast to be flat on the year in February. The market had expected prices to quicken 0.2 percent.

(Editing by Alex Richardson)

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